Guest Post: The Role of GATT Article XII in Interpreting and Applying Section 122

This is a guest post by Phillip W. Magness, a Senior Fellow and the David J. Theroux Chair in Political Economy at the Independent Institute, and Stan Veuger, a Senior Fellow at the American Enterprise Institute.

On May 7 a three-judge panel of the Court of International Trade (CIT) ruled against the Trump administration’s latest round of global 10% tariffs. The government argued that Section 122 of the Trade Act of 1974 authorizes these import duties because we face a “large and serious balance-of-payments deficit.” There is one problem: we do not.

Historically, under the Bretton Woods system of fixed exchange rates, a balance-of-payments deficit meant a drawdown on the country's official reserve assets. But Bretton Woods ended half a century ago. Under the flexible exchange rate system we have today, there cannot be a surplus of dollars that forces an outflux of gold or otherwise triggers a balance-of-payments crisis. Instead, the exchange rate–the price of the dollar–simply adjusts.

After previously acknowledging that trade deficits and balance-of-payments deficits are “conceptually distinct,” the Trump administration is now attempting to blur the distinction. Thankfully, the CIT, relying heavily on legislative history, saw through this chicanery.

As the government prepares to appeal its case to the Federal Circuit, it is important to emphasize how badly they have misconstrued Section 122’s purpose. One aspect of its history has not received much attention yet: its relationship with the General Agreement on Tariffs and Trade (GATT). This landmark trade agreement makes it crystal clear what a balance-of-payments deficit is.

Article XII of the GATT, as amended in 1955, allows member states to enact import restrictions to safeguard the balance of payments. This provision only permits countermeasures “to forestall the imminent threat of, or to stop, a serious decline in [a member state’s] monetary reserves” or, if reserves were very low, “to achieve a reasonable rate of increase in its reserves.” This is precisely how economists, plaintiffs, historians, and now the CIT have defined the balance-of-payments. And the provision remains in force. In fact, the administration invoked Article XII as the legal basis for its Section 122 tariffs when it notified the WTO.

Congress was fully aware of this article when, in 1973, it started work on what would become the Trade Act of 1974. In fact, in June of that year the Senate Finance Committee commissioned a study of how Article XII worked. In the study, Article XII’s conceptualization of balance-of-payments deficits is simply taken as given. The same year marked the beginning of the Tokyo Round of GATT negotiations. By revising our trade laws, Congress aimed to equip US negotiators with leverage tools under the GATT provisions – not to run afoul of Article XII by dramatically expanding the definition of balance-of-payments deficits, as Trump now imagines.

The language of Section 122 itself makes the distinction between balance-of-payments and trade deficits clear as well. It explicitly refers to the trade balance just a few lines down from the balance-of-payments provision the government relies on, demonstrating that legislators saw it as a distinct concept.

When introducing this section of the bill Senator Russell Long (D-LA) explained that “our payments deficit had grown from a bearable $2.9 billion” in 1962 “to an intolerable $14.7 billion” – figures that could only refer to the monetary reserve drawdown found in accompanying measures from the Commerce Department. He differentiated this statistic from a distinct $11 billion “trade deficit” that emerged in 1971-72. In his own testimony, U.S. Trade Representative William Eberle confirmed that Section 122 sought to equip “current negotiations for international monetary reform” by codifying a tool “to achieve and maintain international payments equilibrium.” He noted that it was meant to be used “for balance-of-payments purposes rather than for altering trends in import growth,” explicitly contrasting the provision’s true purpose with the Trump administration’s interpretation.

The economics and history are clear. Section 122 applied to monetary reserve balances, not trade deficits. If President Trump wants to impose a worldwide tariff because he believes that will improve the economy, he should convince Congress to pass legislation. He should not be allowed to rely on word games to circumvent the Constitution.